Michel Richaud Economic Impact of the 2014 Winter Olympics Economic Impact of the 2014 Winter Olympics I. Introduction Economic Impact of the Games in the City (Overview) The Organizing Committee of the Olympic Games (OCOG) for the Sochi Winter Olympics has set high goals not only for the success of the Olympics, but also for the development of Sochi and the Krasnodar region due to the investments and efforts that are being put into this enormous event. It was originally estimated that the games would cost around $12bn but it has recently been reported that that figure has gone up almost 5 times to a whopping $51bn (Gibson, 2013). Along with the increase in the investment, the organization will have to deal with a great deal of controversy on how those funds are being spent. Corruption is inevitably at the headlines of most Sochi-related articles. Opposition reports are stating that the vast majority of the investments destined for the Olympics are coming from public sources such as state budget, loans from state banks and state guarantees and that those have been disappearing in corrupt building contracts. To put it in perspective, this Winter Olympic Games will cost more than the previous 21 Winter Olympics combined (Nemtsov & Martynyuk, 2013). While the Olympics in Sochi will benefit Sochi because of an increase in investment attractiveness, growth in business activities, the creation of a modern sports cluster of federal significance, the creation of new jobs, and the development of transport infrastructure (Chernyshenko, 2013) the upcoming Winter Olympic Games in Sochi will have to demonstrate an enormous amount of success both during and after the games to prove that the financial and political investments were worth it. Michel Richaud Economic Impact of the 2014 Winter Olympics A positive economic impact in Sochi and the Krasnodar region will come hand in hand with how successful the Olympic Games are handled because Olympic cities rely very much on public perception, especially one that is building an entire new sporting complex and pretends to leverage most of the expenditure on future tourism and international events (Chernyshenko, 2013). These Games have a lot of challenges to confront and will need to step up to the $51bn expectations that have been created. These challenges come in various ways: corruption within the Russian government, international protests for gay rights, tropical weather for Winter Olympic Games, and increasing security measures due to the location of the Olympics. Sochi relies on a clean and smooth month of Olympics to initiate a positive chain of events that would put the city on the sporting world map for decades to come; not an easy task. “The image of the Olympic Games is strongly influenced by the media. Reports about the quality of the organization or unexpected incidents, for example, strongly influence the image of the Games and the city. The city will keep this image for years. Despite hundreds of sponsors, Montreal 1976 Olympics are still thought of as a deficit Games, the Los Angeles 1984 Olympics are considered profit-making Olympics because of their excellent marketing and the Seoul 1988 Games are considered to have opened the door to the world for Korean corporations.” (Preuss, H, 2004, p.153). II. Background Examples of Other Host Cities The last three Olympic Games: Beijing 2008, Vancouver 2010, and London 2012 have had costs that include Olympic-related infrastructure of $43bn, $8.9bn, and $13.9bn respectively (Gibson, 2013). Given Michel Richaud Economic Impact of the 2014 Winter Olympics these numbers it is perfectly valid to ask why are the Sochi Olympic Games worth more than all of those and almost six times as much as the last Winter Olympics (Vancouver), where are the funds coming from, and what are the main objectives of such funding. In general Olympic Games’ funding can come from four different entities: the government of the host country, the region, the city, and the private economy sector (Preuss, H, 2004). Olympic Games such as Montreal 1976 and Munich 1972 were heavily financed by the public sector, Seoul 1988, Barcelona 1992, and Sydney 2000, had an important mix of public and private funding, and finally, the Atlanta 1996 and Los Angeles 1984 were almost fully privately funded. The Olympic Games that heavily rely on public funding are those that need a complete renovation or creation of infrastructure. “The Games are often used as an instrument to solve urban problems. When a city is elected host city the time pressures that it experiences frequently lead to the breaking of deadlocks in urban planning. The Games offer the chance of achieving an acceleration of development and is thus motive for local politicians.” (Preuss, H, 2004, p.22) This funding is intended to last for a long time and not only serve for the duration of the Games. One of the consequences of this type of funding is a negative public perception because the Games don’t seem profitable. That is why US cities such as Atlanta and Los Angeles that needed little infrastructure changes abstained from using public funds for their Olympic Games. Skepticism over the $51bn Sochi Investment For the Sochi Games we still don’t know the exact percentage of public vs. private funding, but all reports suggest that public investments overpower those of the private sector. The Russian Government has been very involved in the whole Olympics process and they are really pushing for a successful event. “During the research period (2005–2011), at all levels of the Russian Federation budgetary system, there was Michel Richaud Economic Impact of the 2014 Winter Olympics increase in total expenses that considerably exceeds the inflation rate. Among the geographical zones in the scope of research, the biggest growth was observed in the Krasnodar region. Over six years, regional budget expenditure without inflation increased more than four times, having essentially outstripped municipal and federal (more than three times) growth rates.” (Chernyshenko, 2013, p.12). The enormous expenditure in the Games has put the eyes of the world in a Sochi and the Krasnodar region. While the Russian government expects that all the investment will catapult Sochi into a first class sporting city for many years, the rest of the world and the Russian government’s opposition are very skeptical about these investments. Dmitry Kozak, the Deputy Prime Minister of the Olympic Preparations has stated that the $51bn reported is a misleading figure and that only $6bn is Olympics-related and the rest as previously mentioned has been used for infrastructure. “That may be true, though it’s hard to imagine the Russian government building an $8.7 billion road and railway up to the mountains without the Games.” (Yaffa, 2014). The $8.7bn road is just one of the examples that have created controversy and exalted the corruption claims. Vladimir Putin, Russia’s President is one of the main targets for these claims. One of his closest friends, Arkady Rotenberg, got assigned at least 21 Olympic Contracts including this road that is the transport link between Sochi and ski resorts in the Caucasus Mountains (Arkhipov & Meyer, 2013). It is well known that Putin has fought hard to put Russia in the spotlight and raise its profile by hosting international events. The two most important sporting events in the world will be hosted in Russian territory with only 4 years apart: The Sochi Winter Olympic Games and the 2018 Soccer World Cup. Russia is still planning to bid for other minor events in comparison to those- such as the 2016 IAAF World Junior Championships (MacKay, 2013) and Formula One races. Additionally, Russia has recently hosted other Michel Richaud Economic Impact of the 2014 Winter Olympics non-sporting international events such as the Asia-Pacific Economic Cooperation summit of 2012. This spotlight is contrasted by the fact that Russia, according to Berlin-based Transparency International, has been found to be the most corrupt country of the Group of 20 Economies (Arkhipov & Meyer, 2013). The Sochi Olympics will need to be as perfect as $51bn can produce and avoid any further controversy because corruption will always be the elephant in the room when talked about the organization of the most expensive Winter Olympic Games in history. Economics in Russia and in the Krasnodar Region To get a clearer view of how developed is Russia’s current economy, a Forbes study (Adomanis, 2013) suggests that compared to larger economies in the Western World, Russia’s economy is still very far behind. In particular, when comparing the United States’ Economy in the 1950’s with Russia’s current economy there can be found some similarities in terms of development. In fact, per capita gross domestic product (GDP) in that time in the US was higher than it currently is in Russia (Appendix: Table 1). With that said, Russia’s economy has not been bad at all, in the past decade it has had its ups and downs but has been growing overall (with the exception of 2009, year of the big financial crisis) according the GDP growth figures from the World Bank (Appendix: Table 2). Specifically, the Krasnodar region since 2005 has had an enormous impulse from extraordinary investments that have been destined for the Provision for Construction of Olympic Venues and the Development of Sochi as an Alpine Climatic Resort. “The gross regional product (GRP) for the Krasnodar region (in current basic prices) has increased from 372.93 billion rubles (2005) to 1,008.15 billion rubles (2010) due to the increase in output and employment in the construction and transportation sectors of the regional economy.” (Chernyshenko, 2013, p.8).